C’mon, admit it. What’s the first thing that comes to mind when you hear of rehabs? Drug and alcohol programs, right?
Spoiler alert: I have no personal confessions to make along those lines.
A “rehab” I’m talking about is a term that investors use for a dilapidated property that needs more than “some love” – it needs some serious work, and may not be in a condition suited for human dwelling when it is first purchased! (“Red Tagged” home, anyone?)
So why would anyone brag about getting such a thing? – Major discounts, instant equity growth after repairs, and the prospects of earning a lot more than rents.
Sounds great, right? So why isn’t everyone getting one? Should you? – Maybe. Or maybe not.
Here are a few things to consider before buying a rehab project (It really is more of a project than a home at first).
- Depending on the extend of damage or neglect that the property had suffered, you may have to obtain building permits, hire licensed contractors, and/or do a whole lot of work and MAJOR amounts of clean-up yourself. Are you ready for that?
- Many rehabs come with major issues: unpermitted rooms (which may or may not have been build up to code), gas leaks, cracked foundations, etc. This means that a regular lender will most likely not underwrite a loan for it. You would have to pay all cash, get a hard money loan from an investor group, or look for other creative ways of funding before the repairs are complete. Once the project turns into a home and is up to code and lender standards, you can usually refinance into a conventional mortgage loan.
- The repairs (including permits, contractor fees, and materials) could run up quite a large tab, especially if you are not very experienced with rehabs and are trying to fix one up too much… Wait… There is such a thing? Yes! If you are handy and bought the place for yourself, by all means, do your thing. However, if you are only fixing the property to flip it or to rent it out, stick to bringing it back to livable conditions and concentrate on remediating code violations. Stay away from investing too much into high-end materials or expensive appliances; just try to bring it up to the level of other homes in the area. This way you will be less likely to overspend, and more likely to recover your investment upon the sale. (Consulting a real estate professional about the home’s future value potential and getting an estimate for repair costs from a licensed contractor will help you make a more informed decision and figure out whether a rehab is going to be an investment gem or a money pit).
- If you want a discount but can’t go the major work route, look for “ugly dogs of the neighborhood” rather than full-blown rehabs. Homes that are “blah” inside and outside, with poor landscaping (if any!), that need clean-up, paint, and re-decorating… but no MAJOR work such as re-roofing, foundation work, or bearing wall repairs. You will most likely not get as deep a discount as a true rehab would fetch, but you are also in a better position to not get in over your head with projects – or get discouraged because the repairs drag on for too long and you have to live in an ugly house.
- Check the dates: if a house is built before 1978, you will likely have to deal with EPA-related lead paint permits and will have to hire ONLY licensed and lead-certified contractors for repairs or risk hefty fines (we’re talking tens of thousands of dollars!). Buy something built in 1978 or after, and you can do a lot of work yourself (please DO check about the local permits and requirements before starting though, as each project and area is different!) If the house is even older than that, you may have to be even more careful – there may be earthquake retrofitting requirements, and possibly a need to rewire the house and upgrade the electrical panel. No matter where you are and what year the home is built in, however, hiring licensed professionals to work on gas, electrical, and plumbing projects will not only ensure that work is done right, but that you can avoid unsavory consequences of rookie mistakes (little things like burning your house down from an electrical short, drinking water that back-flushed from toilet tanks, or getting headaches from natural gas poisoning…).
Yes, they can be a lot of work and a headache, but rehabs can save you a huge chunk of change off the house price if you are up for work and can put up with mess for a while. So, if they are such great deals, are they not all snapped up by investors already? Not all. But they do disappear off the market fast – some as fast as one day.
Lucky for all of us who want to save money and are willing to put in work, there are many people who leave properties in terrible conditions for one reason or another, and there are always fixer-uppers available on the market. Most new buyers, naturally, would like a nice, clean, move-in ready home they can buy, so the fixer-uppers get shunned by them. Investors, however, love rehabs, and act quickly. This is why, if you truly want a fixer deal and you find one, you need to have your “ducks in order” financially, know what you can afford, and be ready to make your move before the deal is snatched away!
So, consider all the factors I just told you about and check where you stand financially, and if you are in the position and in the mood to “Do rehab and brag about it”, let’s go get one!
Marina Alkasas | Realtor® |Cal DRE License # 02070557 | Century 21 CARE
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